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Yahoo, Hype, And A Billion For Facebook

By: David Utter

College and high school networking site Facebook has been rumored to be in acquisition talks with a handful of companies, with the latest rumor calling for Yahoo to plunk down $1 billion for the company.

Yahoo, Answers, And A Billion For FacebookThe early report about Yahoo (YHOO) purchasing Facebook for $1 billion began making the rounds courtesy of a Wall Street Journal article. Although Facebook's owner Mark Zuckerberg has chatted with Microsoft (MSFT) and Viacom (VIA.B), it could be Yahoo that wins the day.

Paying out a figure approaching a billion dollars for Facebook has been equated to Google (GOOG) partnering with MySpace for $900 million. Facebook reportedly has 9 million members, well below the numbers for MySpace.

Sometimes it is a bad bet to go against the Journal in these kinds of reports. They handily nailed Apple's switch from PowerPC to Intel chips in the summer of 2005. But they also had AOL going with Microsoft instead of Google in December 2005. AOL opted for a billion-dollar deal with Google just before AOL bought Truveo for its video search technology, effectively placing it in competition with Google's video efforts.

Technology is a crazy world. Yahoo buying Facebook would be crazy for a few reasons. First, the company saw enough of a decline in its vaunted display advertising business to announce a lowered forecast for its quarterly numbers.

That may be a cyclical event, due to bounce back nicely in the company's fourth quarter. After a year of seeing its stock price decline, does CEO Terry Semel want to make a billion-dollar bet on that bounce, especially with the continued delays to its launch of a new contextual advertising system?

Yahoo has a $35 billion market cap, and a P/E ratio under 30. It's been argued that the market has undervalued the company. They could afford to take a hit from a Facebook purchase, even if it ends up being only of incremental benefit to the company.

Gambling, it has been said, is not about what you can win, but what you can afford to lose.

There are two good reasons for taking the position that Yahoo won't spend hundreds of millions on Facebook. One reason is AOL, and the other is Yahoo! Answers.

Yahoo got out of the bidding for AOL relatively early, leaving Microsoft and Google to fight it out for the search and advertising deal with the online services provider. If Yahoo would not spend a billion on AOL, it does not make much sense for them to spend that kind of money on the far smaller Facebook.

In considering Yahoo! Answers, one has to consider the other social networking purchases Yahoo has made. They have picked up websites like, Flickr,, and others for much lesser prices.

Developers built Answers internally, and proof of its success may be seen on the Yahoo home page. A link to Yahoo Answers has been prominently placed under the search box, and even before that the service had experienced warm approval and growth.

It's a primarily younger audience at Answers, judging by the questions being asked. And that is why Yahoo won't buy Facebook. They already have that audience and lots of social networking features in place. It doesn't make sense for Yahoo to potentially reacquire a userbase that already may be using Yahoo services today.

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